Crowdfunding A Venture? Not as Easy as It Sounds
Readers may be familiar with sites like Kiva, Kickstarter, or SecondMarket and wonder if there is a way to attract smaller investments into corporations in a more scalable way than the traditional handshake-by-handshake process with Angel Investors or Venture Capital groups.After all, the acceptance rate with traditional groups is shockingly low.
Unfortunately, the Securities Act and SEC rules aren’t set up to make Crowdfunding easy. The 1933 Securities Act was a response to the crash of the 1920s, and its goal can be summed up concisely: protecting purchasers of securities by informing them about the companies they’re investing in.
This is why the public sale of securities requires detailed and expensive public filings (known as “registration” with the SEC). It’s also why so many of the exemptions from this registration requirement revolve around raising money among small groups of “sophisticated investors.” Funds, banks, and wealthy individuals are among the sophisticated and they may invest without forcing the company to register with the SEC.
By now you can see why the Crowdfunding model doesn’t jive with the SEC. If you can only sell unregistered securities to small groups of sophisticated people, then posting your securities for sale all over the internet for anyone to purchase is a clear no-no.
But not all hope is lost. Law Professor Steve Bradford covers this area marvelously in a recently released draft article, Crowdfunding and the Federal Securities Laws. You don’t have to be a lawyer to get a lot out of this, either.
The big takeaway from Professor Bradford’s article for a startup or small company is that there’s more than one way to Crowdfund, and some methods won’t put you on the SEC’s naughty list. According to the professor, methods that resemble loans or that offer one-time rewards for investment rather than a share of profits are among the safer alternatives.
That said, the area is still complex and the article only draws a general legal border around the issue. It doesn’t weigh what’s the best business decision. Always consult with your advisors or general counsel before taking the plunge.
UPDATE (9/13/2011): The President’s American Jobs Act includes a proposal that would allow for crowdfunding - specifics still to come!
